Cardinal Health, Inc. — Q2 Fiscal 2021 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2020; fiscal year ends June 30. Comparisons are with the corresponding prior-year periods unless noted. Amounts are U.S. dollars.
Business context and results
Cardinal Health provides healthcare products and supply-chain services through its Pharmaceutical and Medical segments. Revenue growth reflected pharmaceutical distribution and specialty solutions customer sales, as well as COVID-related demand patterns in Medical.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $41.5 billion, up 5% | $80.6 billion, up 5% |
| GAAP operating earnings/(loss) | $461 million, versus $334 million | $(163) million, versus $(4.93) billion |
| Non-GAAP operating earnings | $628 million, down 3% | $1.246 billion, up 2% |
| GAAP diluted EPS | $2.13, versus $0.75 | $1.27, versus $(15.99) |
| Non-GAAP diluted EPS | $1.74, up 14% | $3.26, up 16% |
| Operating cash flow | $1.487 billion |
Quarterly GAAP net earnings attributable to Cardinal Health were $629 million; six-month net earnings were $376 million, versus a $4.702 billion loss a year earlier. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Segments, margins and material period comparisons
- Pharmaceutical: Revenue grew 4% in the quarter and 5% year to date. Segment profit declined 11% to $413 million in the quarter and 5% to $815 million year to date. COVID-related volume declines in generics and Nuclear and Precision Health Solutions weighed on profit; branded pharmaceutical mix partly offset the impact.
- Medical: Revenue grew 7% in the quarter and 4% year to date. Segment profit rose 21% to $236 million and 28% to $466 million, respectively, supported by laboratory volumes, PPE contribution and cost savings, partly offset by reduced surgical demand.
- Gross margin: Increased 4% to $1.776 billion in the quarter and 3% to $3.491 billion year to date. Gross-margin rate fell 3 basis points and 7 basis points, respectively, mainly due to pharmaceutical distribution product and sales mix. Prior-year comparisons also included $56 million of surgical gown recall charges.
- Interest: Net interest expense declined 27% to $46 million for the quarter and 29% to $91 million year to date, primarily due to lower debt outstanding.
Cash flow, liquidity and debt
Cash and equivalents were $3.737 billion at December 31, 2020, up from $2.771 billion at June 30, 2020. Six-month operating cash flow of $1.487 billion was driven in part by timing of vendor payments and working-capital movements. The company paid $289 million in dividends and spent $174 million on capital expenditures during the six months.
Total long-term obligations, including current maturities and other short-term borrowings, were $6.7 billion. No amounts were outstanding under the $2.0 billion commercial-paper program/revolving credit facility or the $1.0 billion committed receivables facility. The company was in compliance with its leverage covenant at quarter-end; the maximum permitted ratio was scheduled to tighten from 4.00-to-1 to 3.75-to-1 in March 2021.
Management said available capital resources and projected operating cash flow were adequate for expected working-capital needs, capital expenditures, obligations, debt service, dividends, share repurchases and potential opioid settlement payments.
Outlook, unusual items and risks
- COVID-19: Management anticipated a further negative effect on fiscal 2021 consolidated operating earnings and Pharmaceutical segment profit. The duration and economic consequences remained uncertain; potential government actions could also create supply disruptions or shortages.
- Opioid matters: The company recorded $1.02 billion of pre-tax opioid-related charges in the six months ended December 31, 2020, compared with $5.63 billion in the prior-year period, and reported a $6.59 billion accrued cash component at quarter-end. Negotiations on a global settlement framework continued, with no assurance of a definitive agreement or satisfaction of its conditions. If agreed, management expected most cash payments to be spread over 18 years, but could not predict when payments would begin. The company stated that it strongly disputes the allegations.
- Other legal exposures: The filing describes opioid suits and investigations, including DOJ investigations; private opioid claims are not covered by the proposed settlement framework. Cordis IVC-filter liabilities and defense costs were accrued at $508 million net of estimated insurance recoveries; the estimated high end of the loss range was approximately $990 million net. A $41 million accrual was recorded following a court ruling concerning New York opioid assessments. The company also recorded a $13 million charge related to a federal investigation into Specialty Solutions discounts and rebates.
- Tax effects: A $420 million tax benefit from a CARES Act net operating loss carryback materially affected reported earnings and tax rates. The company intended to seek a $974 million federal refund, expected within 12 months, and recorded it as a current asset. It also increased non-current deferred tax liabilities by approximately $700 million. The refund and related tax estimates could be challenged or revised. Management expected opioid-related tax accounting to significantly increase the income-tax provision for the rest of fiscal 2021.
- Other items: Quarterly GAAP operating earnings benefited from comparison with prior-year surgical gown recall charges. Six-month GAAP operating results in both years were heavily affected by opioid litigation charges. The filing provides no clear numeric fiscal 2021 earnings guidance in the supplied text.
Most important facts for investors to verify
- Whether the opioid settlement framework becomes a definitive agreement, its final amount and payment schedule, and whether the $6.59 billion accrual remains adequate.
- Actual collection and tax treatment of the expected $974 million CARES Act refund, and any revisions to the $420 million tax benefit and related estimates.
- COVID-19 effects on Pharmaceutical volumes, Medical surgical demand, PPE contribution and operating cash flow.
- Developments in Cordis IVC-filter claims, DOJ investigations and other legal proceedings, including potential exposure beyond recorded accruals.
- Working-capital cash-flow movements, debt and covenant headroom following the scheduled covenant tightening in March 2021.